Neogen Corp (NEOG) 2011 Q2 法說會逐字稿

Welcome to the Neogen second-quarter fiscal year 2011 earnings results conference call. My name is Monica, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to James Herbert. Mr. Herbert, you may begin.

Good morning and welcome to our regular quarterly conference call for investors and analysts. Let me begin this morning by wishing each of you a prosperous and happy new year. Though I am sure we will all see opportunities over the next calendar year, the one that we just finished was a pretty good one for Neogen Corporation.

Though we don't report our business on a calendar year basis, I thought it would be interesting to see out how Neogen compared in the 12 months of 2010 to the 2009 year, and that consistency of performance was still intact, as over the past 12 months, our earnings-per-share were up approximately 34%, with revenues up about 26%.

However, the purpose of our call today is to report to you on Neogen's second quarter of our 2011 year, which ended on November 30. I will remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risk and uncertainties, and the actual results may differ from those that we discuss today. These risks that are associated with our business are covered in part in the Company's Form 10-K, as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us today by this live telephone conference, I'd also welcome those who may be joined by way of simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the web for approximately 90 days.

Following our comments this morning, we will entertain questions from participants who are joined by this live conference. And I'm joined today by Lon Bohannon, Neogen's President, and unfortunately say to you to that Rick Current, who usually joins us at this time, our CFO, came down last evening with a stomach virus, and we suggested that he stay home this morning. I suspect, however, that Lon or I can answer many of the questions that you might have for Rick, and of those that we can't, well, we will get those responses back to you probably even later today.

Earlier today, Neogen issued a press release announcing the results of our second quarter of this 2011 fiscal year. Once again, I am pleased to report another record-breaking quarter, and I continue to give the credit to our team now of over 600 employees that are located in several places around the world, who have continued to remember that the toughest thing about success is that you have to keep on being a success.

Our second-quarter revenues climbed 25% over the same quarter last year. Revenues for the quarter were $43.9 million as compared to $35.2 million last year. There were no surprises in those revenues for the quarter, with this actual coming in at about, I think, 99.4% of our budget that we had projected, despite the fact that we had some currency translation issues.

Once again, these revenues added to Neogen's stream of quarterly revenue successes, marking the 75th quarter in the past 80 in which we've shown increased revenue compared to a year earlier. Or stated another way, there have only been five quarters in the past 20 years that we've failed to beat previous year revenues.

Our net income growth even surpassed our revenue growth, up 33% from last year's second quarter. Net income for the quarter was about $6.1 million, or $0.26 a share, compared to last year's $0.20. I said earlier that our revenues for the quarter were almost dead on what we had expected about eight months ago when we put our budgets together. However, our profit from operations were about 12% better than what we had budgeted. In a few minutes, Lon will talk about a few of the things that we did to make that possible.

On a year-to-date basis, for the first six months of the fiscal year, our revenues are now up 28% to approximately $86.9 million from last year's $67.6 million. The year-to-date income for the same six-month period increased 33% to $11.9 million from $9 million in fiscal year 2010. So on a six-month basis, this translates to $0.51 per share for the first six months compared to the previous year's $0.39 a share.

The outstanding performance for the quarter was pretty broad-based between both our Food Safety and our Animal Safety divisions, and they're very even within the various product and marketing groups within each of those divisions.

Growth in our international revenues for the quarter, I think, is noteworthy, as approximately 43% of the revenues were derived from international sources. Over the past several quarters, we've been holding a constant of about 40% of revenues, which, frankly, I thought was pretty good because we had been growing our domestic revenues pretty rapidly. But we were able to achieve the growth this quarter up to the 43%, even though currency translations detracted from the record. Those translations, some of you, I know, always would like to know that -- translations accounted for about $434,000 reduction in revenue as compared to a year earlier and about a $367,000 reduction in operating income.

International sales came from numerous sources, but once again, Neogen's subsidiary operations in certain key countries continued to be very promising. Our Neogen Europe operations showed a 41% increase in revenue, even after an adverse currency translation.

Our Neogen Latino America operations, located in Mexico City, showed a 33% increase in revenue for the quarter. And our Neogen do Brasil operations are now up and running strong and contributing to our total.

Though there were a lot of great accomplishments from operations during the second quarter, let me save those for Lon's analysis. However, there are some issues that continued to develop in the economy and with government regulations, both internationally as well as here in the US, that do bear some discussion, I think.

Though there is a fair amount of uncertainty attached to many of these, they should all be Neogen growth drivers. Likely the most publicized of these has been the Food Safety Modernization Act, which had a tortured, zigzag course through the Congress for over a year, but was finally passed within hours of the time that the Congress headed home for the holidays. And I understand it is on the President's desk, scheduled to be signed into law today, perhaps.

The chief focus of this legislation was that the Food and Drug Administration, it is the intent -- or was the intent of Congress to pass a measure that would allow FDA to focus on preventing foodborne outbreaks rather than reacting to those outbreaks after they occur. Even though the bill is now passed into law, or soon will be signed into law, it will take months to write the rules that will allow the Agency to begin enforcing many of these aspects. Some aspects, though, will take immediate effect. For instance, I believe that FDA now has the authority to order a food recall, whereas in the past, the Agency could only request a recall from the food processor.

Like past legislation, this new legislation will not have an immediate impact, but instead, we think we will see Neogen opportunities grow in an orderly fashion as companies adopt the new regulations. As an example, companies will have 18 months to begin complying with the central measure of the bill, and this is a requirement that all food processing companies examine their processing systems to identify possible ways that food products could become contaminated, and that they develop detailed plans then to keep these from happening.

More testing will be required in order to validate these plans. This will be almost a twin to what has been done at USDA in the development of their Hazard Analysis Critical Control Points program you've heard us mention in the past. The difference, however, between FDA and what has already happened at USDA is one or two orders of magnitude bigger in terms of food processing facilities. Frankly, I'm not sure how -- that we even know how many facilities will now fall under the new regulation at FDA. However, the Congressional Budget Office has estimated that 50,000 foreign and domestic food facilities will be inspected by the year 2015 by FDA, and/or some other official agency acting on FDA's behalf. And I suspect that few, if any, of those 50,000 are currently being inspected today.

Likely the greatest impact, at least initially, will be on foreign imports of food, where FDA will be required to test more food at US ports, as well as inspect food processing plants in the countries outside the US. The riskiest facilities are expected to be first in line.

This new law also allows FDA to be more proactive back at the farm production level, where food is being produced. We've already seen a taste of that in that FDA's stepped up enforcement on salmonella in shelled eggs, all the way back to the chicken farm level that we talked to you about three to four months ago.

Our strategic locations in Brazil, Mexico and China, I think, should benefit from this increased international emphasis from FDA.

From the international front, it is also going to be interesting to watch economic events unfold over the course of the next year as it relates to food production and demand for raw materials such as corn. All of this will likely have some impact, both positively and negatively, on many of our customers. Corn right now is getting the lion's share of the attention because of the various -- its various competitive uses. Recent Congressional support for corn-based ethanol production will continue to put upward pressures on corn prices. China could emerge as the world's largest importer of corn, which would reshape the whole global grain market. In the past, China has imported soybeans, but practically no corn. In 2010, we don't know those numbers exactly yet, but it's estimated that China imported about 50 million bushels of corn; but that could easily jump all the way to 1 billion bushels of corn, some people believe, by 2015, which is just four years away.

During 2010, corn prices increased about 60%, and this increase in demand is draining the US reserves to the lowest levels that we've seen in about 15 years now. This export surge would be mostly beneficial to US farmers, who currently control about half of the world's corn trade. However, the increased demand and increasing pricing is clearly going to put more pressure on US companies who need corn to produce animal proteins or to make food ingredients.

Because of -- basically talking about producing animal protein and based on the figures that I'm seeing, it appears that the US beef cow herd continued to shrink during 2010, and that these numbers might be down as much as 2%. This reduction, though it will be helpful to cow/calf producers, but the reduction along with -- of supply, along with increased feeding costs, will undoubtedly push beef prices higher as we look at the coming calendar year.

Pork producers increased their supply by about 1% during 2010, but corn prices will certainly impact their profitability in the year ahead. And the poultry suppliers are forecast to be up about 2% to 3% in 2011, and these producers are large users of the nation's corn crop.

I think what has not been weighed in in all of this is consumer economics -- where and when will buying resistance develop. Neogen watches the impact of all of these shifts not out of fear, but instead to make sure that both our Food Safety and our Animal Safety groups are focused in the right place. Food consumption is not going to drop. The safety of food is going to continue to gain in emphasis. And the producer and the processor challenges are going to continue to grow. Our job is to make certain that we have the right solutions and are in the right place to be of help.

Let me -- with those comments, let me stop at this point and turn the conference over to Lon Bohannon to talk more about some of the real color of the various areas of the quarter, and then I will come back for a few minutes to give you my thoughts on what I see might happen over the next few quarters. Lon?

Thank you, Jim, and welcome to our listeners on the conference call, as well as those joining us via Internet access. Like Jim, I would like to begin by first wishing all of our listeners a very prosperous new year. I know all of us at Neogen are looking forward with great enthusiasm to the 2011 calendar year.

As Jim mentioned, Neogen issued a press release earlier today reporting our operating results for the second quarter and first six months of our 2011 fiscal year. Neogen's percentage growth in sales and net income for the three months ended November 30, 2010 was very similar to our exceptional first-quarter results. And as you heard, the second quarter set new quarterly records for Neogen in terms of sales, net income and earnings-per-share, and continued our remarkable track record for consistent growth in sales and profitability.

Neogen's revenue growth for the second quarter and actually for the first six months of our current fiscal year was broad-based across a number of market segments and many product lines. Acquisitions have made a significant contribution to overall sales growth this fiscal year, but organic growth has also been very strong. Adjusting for currency translation, organic sales growth came in at 10% in the second quarter and stands at 13% on a year-to-date basis.

Let me take just a few minutes to discuss some of the many highlights in the second quarter. Food Safety division experienced a strong second quarter, with overall growth of 16%. This division achieved solid growth in most all of the market segments we serve, including grocery products, meat and poultry, nutraceutical market and pet food. One exception to Food Safety's quarter-to-quarter growth performance came in the area of sales to the milling and grain market. Sales to this market segment actually declined in the second quarter compared to the prior year. Those of you who have listened in on these calls remember that last year's corn harvest experienced widespread mold contamination, resulting in a very high level of testing for the mycotoxin, DON. That mold growth was not repeated in this year's corn harvest to the same extent, and lower levels of DON testing relative to last year's unusually high volume of testing will continue in the milling and grain segment for the rest of this fiscal year.

Unfortunately, one of Neogen's strengths is its broad-based line of diagnostic products that serve many market segments, which more than offsets the impact of an unfavorable comparison in a single market or product line, like we will experience this year in the area of mycotoxin testing in the milling and grain market.

For example, sales of diagnostic tests to detect specific foodborne pathogens, like salmonella and Listeria, increased 12% in the second quarter. Sales of Neogen's proprietary Soleris system, used for the detection of spoilage organisms, such as yeast and molds, were up 17%. Even more impressive was our growth in sales of test kits for various allergenic compounds, which increased 87% in the quarter. This overall growth was a combination of last year's acquisition of the BioKits' line of allergen tests from Gen-Probe and continued organic growth of Neogen's existing food allergen test kit line.

Other food safety product lines that achieved strong growth in the quarter included the Company's line of tests for dairy antibiotics, which were up 9% despite unfavorable currency adjustments, and Neogen's line of dehydrated culture media, which was up 20% compared to the prior year.

The Animal Safety division also experienced an exceptional second quarter, with overall sales up 34% compared to last year. Revenues recorded by GeneSeek, the genetic service laboratory that was acquired by Neogen in April of 2010, contributed significantly to the overall sales growth for the Animal Safety group. The GeneSeek business continues to exhibit strong growth domestically and internationally by providing genetic test services related to animal breeding, identity verification and disease management.

The diagnostic product lines part of the Animal Safety group also experienced an exceptional second quarter, led by sales to the forensic market for test kits for drugs of abuse, which increased 30%. We also saw a 28% growth in sales of reagent substrates sold to other diagnostic test kit manufacturers.

The venerable Ideal veterinary instrument sales were up 25% and specialty needle sales to large OEM accounts rebounded from a relatively slow first quarter to achieve 93% growth in the second quarter.

I guess the only other product line for Animal Safety that I would mention were our sales of rodenticide, which increased 15% this quarter as a result of strong growth in the agronomics market segment, a successful fall marketing promotion and continued gain of market share with animal protein producers and processors.

As Jim mentioned, Neogen's international sales exhibited especially strong performance in the second quarter, representing 43% of total revenues. Neogen Europe group once again overcame those unfavorable currency headwinds to post an outstanding 41% increase in sales for the quarter. Jim talked about Neogen Latino America, which had solid growth, with sales up 33%. And with the addition of our BetaStar dairy antibiotic test, the Neogen do Brasil group is now selling Neogen's complete line of food safety products, and they have also filed the necessary documents to add important Animal Safety products, like rodenticides and disinfectants, for sale into Brazil.

In today's economy, those international markets continue to gain importance and they provide some of the best opportunities for future growth for Neogen.

Now, looking at operating margins, our operating margin for Neogen continued to outperform our internal objective, coming in at 21.9% and 22.1%, respectively, for the second quarter and first six months of the current fiscal year. Any operating profit over 20% is above expectations, and our outstanding performance thus far in fiscal year '11 reflects a favorable product mix, as well as our ongoing efforts to reduce cost and increase productivity. Direct labor, overhead sales and marketing and G&A were all below the prior year when expressed as a percent of sales.

Over the course of the last couple of years, on occasion, I have mentioned the fact that we have a number of ongoing projects that are specifically aimed at either improving productivity or increasing our operating efficiencies or even reducing the costs of our raw materials. And I'm particularly proud of a number of our operations teams in several areas where they've had great success, which has helped drive that operating margin number. I don't think it is -- I don't think I need to go into the specific projects that we've got, but I think it's important for you to understand that is a culture at Neogen Corporation that we will continue to promote, and a big reason that we've seen those increases in operating margins to above 20% is because we've had success in some programs that were initiated as much as a year and a half ago. So we will continue to (technical difficulty), and I think that bodes well for the operating margins going forward.

Equally impressive is Neogen's strong balance sheet and cash flow from operations. Cash has increased approximately $22 million in the first two quarters, and virtually all of that increase was provided from operations.

Over the same period, our investment, accounts receivable and inventory has increased approximately 1% despite a significant increase in sales. As you know, stockholders' equity has increased almost $19 million, or 12.4%, during the first six months of the current fiscal year. So obviously, Neogen has a very strong foundation for future growth.

And I think in terms of a comment about growth, it is a nice segue for me to offer some thoughts on what I see for the quarters and years ahead. As I look at the next two quarters, I guess I would characterize my outlook as cautiously optimistic. Obviously, Neogen has good sales momentum, we have a great product portfolio and a balance sheet that has never been better. I'm not worried about our ability to meet user demand with quality products or maintaining what I consider to be an industry-leading customer service and support, all of which adds to my overall optimism.

But I don't think it is prudent to totally ignore an economy that remains somewhat uncertain, with a stubbornly high rate of unemployment. On December 10, The Wall Street Journal reported that big US food manufacturers are approaching 2011 warily, with lower earnings expectations and some tepid outlooks. Rising costs for commodities, like Jim talked about, such as corn, could squeeze large food companies, like ConAgra and Kellogg, in addition to dampening outlooks for companies involved in animal protein production, like Tyson and Smithfield's, where feed is a significant cost ingredient.

In addition, Neogen did see some scattered indications that we are still in the midst of a slow recovery, at least domestically, as a couple of distributors failed to place normal stocking orders in November as part of their overall efforts to hold down their investments in inventory. And although we have seen improvement in terms of customers willing to make capital expenditures, we did have a few customers that continued to hold off approving capital expenditures to purchase things like our Soleris reader instruments.

So all of these factors cause me to maintain an appropriate level of short-term caution regarding the overall economic conditions surrounding food production from inside the farm gate to the food plate.

However, I've never been more excited about Neogen's longer-term prospects, especially as it relates to opportunities in rapidly growing international markets and our growing pipeline of research projects associated with new and improved products. In addition, I do believe the overall US economy is improving, and that Neogen should be able to gain market share with industry elite and multinational accounts to help us overcome many obstacles associated with a sluggish economy.

Accordingly, I continue to believe that the overall outlook for Neogen has never been better. That concludes my comments for today, and I will turn it back over to Jim for some closing remarks.

Thank you, Lon. I'm sure you can tell from Lon's comments that the real key to our success has been his group taking advantage of our growth strategy by converting this into top-line and bottom-line successes. I believe that Lon has a set the right tone for our operating group -- continue to be optimistic, but don't lose sight of the fact that the economic recovery is continuing at a slow pace, not just here in the US, but in many of the other countries that are important to our business.

Like Lon, I am very optimistic about Neogen's growth in revenue and profitability over this next 12 months as we look out over our calendar year. We'll still keep our basic plan of growing the Company through our expanded products to our current customer base. We will continue to record synergistic acquisitions. We will make sure that the areas of growth that we participate in are applicable to international markets, not just domestic. And for the fourth piece of the strategy, we will continue to work to gain market share.

As I announced to you last quarter, I am pleased with our new products that are coming through the pipeline. Though we don't have an acquisition to announce to you today, there are good opportunities that continue. I spent some time earlier here this morning talking about our international growth, and I feel good that we are now pushing those revenues along at a little faster clip than we had been over the last two or three quarters. I do think, however, that we can put some additional emphasis on market share, and we will begin to make some rather significant strategic shifts in that area over the next several months.

As some of you know, Neogen management spends a great deal of time prior to the beginning of each year in the planning and the budgeting process. This process serves us well and has set the course of where we are going for the year that is ahead of us and what we need to do in order to achieve those results. Though we often make midcourse corrections, they are generally pretty minor.

As I said in my earlier comments, the revenues for the first two quarters have been in keeping with what we had forecast in this annual plan. However, our operating profits and the cash flow generation have exceeded our earlier expectations. This is a result of a lot of efficiency moves that Lon discussed, along with a good job that the team has done in holding down our operating capital that is devoted to Accounts Receivable and inventories. As Lon pointed out, even though we've increased revenue significantly, we've increased accounts receivable and inventories by only about 1% compared to where we were at the beginning of the year. This has pushed cash up to approximately $44 million at the end of the second quarter, and I'm sure somebody is wondering what is going to happen to that cash.

This has given us more expansion capital than we anticipated that we would have when we developed the annual plan for this year. Back several months ago, I challenged our operating managers to identify expansion opportunities that they had not focused on earlier, with the caveat that the use of extra capital needed to be accretive at both the top and the bottom line. I've asked where they could use some money that would bring in increased revenue in the next couple of quarters and would make a contribution to our operating profit.

Both our Food Safety and Animal Safety groups have accepted this challenge, and we are now reviewing a number of proposals that I expect we would begin to implement in the next couple of months. We know that the markets we serve are growing, and I believe that based on our revenue increases, we are getting some increased share of those markets. However, I believe we have the necessary financial resources and the talent to put more emphasis behind market share growth, and I expect this use of available cash will help us step up that organic growth.

Now, I would say to you, don't worry, we're not planning to do anything stupid, nor are we planning to step outside of our normal -- of our regular mission for the Company. Furthermore, we will closely monitor these new activities to make certain that we are achieving the results that have been anticipated.

As part of the changes coming up, it is also my pleasure this morning to introduce to you a new member of our senior management, Mr. Steve Quinlan. You will be hearing more from Steve in the coming months as he assumes the role of Neogen's Chief Financial Officer, replacing Rick Current. Rick is leaving -- is not leaving us on a permanent basis. Even though he is not here this morning either, this was certainly not expected -- his absence this morning. But furthermore, Rick is not leaving us on a permanent basis, but he did tell us several months ago that he would like to start to slow down and begin to try to get himself acclimated toward an eventual retirement. And of course, it is a consideration that Rick has certainly earned.

When Rick joined us 10 years ago to replace Lon Bohannon as Chief Financial Officer, we had total revenues of about $22 million and a market cap of about $50 million. That, of course, now compares to revenues in the last 12 months of $160 million and a market cap now over $900 million.

Rick has certainly earned the opportunity to spend some time in one of his two Florida condominiums, especially at this time of year, when the white stuff on the ground is sand and not snow and doesn't need to be shoveled. Because of our desire to have a strong and experienced CFO, we spent a number of months in the selection process, and we are very pleased to welcome Steve Quinlan to that spot, after having spent several months in discussion and all of us getting to know each other better. We will be issuing a more detailed press release on Steve later this week but I can give you kind of a quick thumbnail sketch.

He is CPA, started his career with Price Waterhouse. For the last 19 years has been with Detrex Corporation, a publicly traded company in the Detroit area, and since 2002, has served as that company's Chief Financial Officer.

In conclusion, we are pleased with the success that we are able to report to you this morning, but continue to follow the title that we've put on this year's annual report, Never Better, but Never Satisfied. This concludes our prepared comments for the morning, and we can now open the conference call for any questions.

(Operator Instructions) Steve Crowley, Craig-Hallum Capital.

Good morning, folks. Congratulations on continued success, Lon and Jim and crew, and welcome, Steve.

In terms of a couple questions, you mentioned success with a couple of businesses you've brought into the fold over the past year. I'm wondering if you can give us a little more in the way of detail as to what the contribution was from GeneSeek and the BioKits business, and maybe a little color about where the success is coming from.

Let me open it up and then let Lon give you some of the particulars. I think what we see so often in our acquisitions is not just what they've brought in as a result of the purchase, but the growth of that business.

As an example, the GeneSeek -- I see that one almost daily, so it is right on the top of my head. When you look back at that business, back -- going back about three years ago, it was doing -- before we had touched it, it was doing about $3 million in revenues, jumped to $6 million in revenues and jumped to $12 million in revenues year-over-year-over-year in the year we bought it. We looked at it and said, well, what can we do? We know we can increase it, but we weren't going to be able to take it from $12 million to $24 million, and we are not going to.

But that, if you look at what came in there, Steve, that was about $12 million that was added as a result of the GeneSeek acquisition, if you looked at what the revenues had been the year before we bought it.

What will it do this year? Go back to my original comments -- what I'm predicting may not come true, so I am covered under the right disclaimers -- but it is going to -- I think she's going to push over $15 million. Well, how much of that is the result of what we've done with the business as compared to what was bought?

And I think the same is true in -- is certainly true with Tepnel and that acquisition. If you look at what has happened, for instance, in Ed Bradley's domestic territories, the US principally, I think you would see that the sales of those diagnostic test kits for the detection of food allergens have increased considerably over what Tepnel had in the US. However, we might see that there has been some reduction in what our other product line was.

So what might look to be strictly as a result of an acquisition, there's also a lot of organic growth that often gets into those, based on what we are able to do with the business under our management, plus the fact that how those get blended.

Lon, I don't know whether you've got specific numbers that can add to that or not.

Yes, we do, and I would reiterate Jim's comments. In the case of both of those acquisitions, the BioKits product line and the GeneSeek acquisition, both of them are running in excess of what we had put in our budgets for this year. Their performance has been very strong.

The GeneSeek group had another strong second quarter, coming in more than $4.5 million, maybe closer to $4.6 million, following a similar type number almost in the first quarter. And that puts them over $9 million on a year-to-date basis. So they've run very, very strong. We had some particularly strong growth in GeneSeek in the second quarter from international opportunities that were realized -- that I think were even -- may have been -- a couple of those may have been mentioned in terms of countries in the press release.

So I think that group continues to do well, and we feel very good about that for the long term because of the kinds of technology that they have and how that can be used to meet the growing demand and increasing demand for food that is going to be needed over the next 20, 30 years.

Tepnel is a little harder -- or that BioKits product line is a little harder to get at because a lot of it is sold out of Neogen Europe and also here domestically. But we've estimated that in total, that group is on a year-to-date basis about -- between $2.2 million and $2.3 million, I think. And once again, we are particularly pleased that our sales teams have been able to take that and actually expand sales from what the previous owners were doing prior to the time that we acquired it.

So both of the acquisitions have been very good. All of those numbers are reported as acquisition are not included in the organic growth numbers that I set, even though I believe that it has been our sales force and our team that has helped drive some of that sales growth this fiscal year.

It sounds like some of the success you've had internationally with GeneSeek wasn't necessarily episodic. You've established some relationships that should be sustainable where you can continue to harvest those over the longer-term.

I think, Steve, that is true with almost all of our GeneSeek business. Of course, that business is still in its early days as far as an overall market and the maturity of the market. It is kind of interesting to see what competition looks like out there now and where we stack up with competition. I think -- I would like to say that I am not sure that we are in a dominant position today, but I would like to think that we can get in a dominant position there pretty quick, considering where our competition is, our resources compared to theirs.

And I would again stress that what we do at GeneSeek currently is -- we will do some things and are doing some things going forward as far as R&D -- but what we are doing there today currently is helping the animal industry in the selective breeding programs to improve performance of -- primarily of food animals, as well as reduce disease stress and all those issues that sooner or later come back to be food safety issues.

So it is very synergistic to what we are doing. Our number one competitor is right now in some financial difficulties. We don't know exactly what may happen there. They currently are in bankruptcy and have a lawsuit or two pending against them. Nothing at this point in that business has, however, impacted our business at GeneSeek. None of that business has been transferred to us, nor are we wishing them any ill will. But there are some things that are happening that could make GeneSeek even more interesting as we look forward -- going forward.

Coming off that strong first quarter, we had some questions and maybe some conservatism around there potentially being some seasonality to that business that made it typically strong in the August quarter. It seems like it hung around that level. Maybe we should disperse some of those concerns about seasonality. Or is there something as we get into the heart of winter here that we should think about the way that business will perform?

Well, I think it is so early, the pattern of business has really probably not developed. I think there was clearly some seasonality if you look back two or three years ago. Now maybe the seasonality is still there; it is just camouflaged by the fact that our overall business is growing.

Part of the seasonality is -- if we look at the cattle population, in particular, if we look at the beef population is that we are not working those beef cattle this winter. That is sort of a spring and fall kind of a situation. So anybody that is doing genomic work, including two of our top customers, both Merial and Pfizer, where their customers are looking at breeding programs, they tend to be at the time they are working those cattle, have got those cattle up in pens and they are able to do some things. They are not doing that now.

So we don't -- we're still trying to develop what -- determine what that pattern is. We've started off it looks like good going into the beginning of the third quarter. But it may not be -- there may be some seasonality show up.

By the same token, we are doing some business in the southern hemisphere, which kind of offset this. Our business in New Zealand and Australia is both good. And we are doing business over on the swine side, which is a little less affected by the climates and the time of year and the seasons.

So it is kind of -- having said all that, I sound like a politician. Damned if I know, Steve, what the seasonality is going to be.

All right. One more question for me and I'll hop back in the queue. You mentioned looking at some projects by folks on both sides of your business to accelerate market share gains and growth. I'm trying to get a little sense for -- without you disclosing details that could compromise your ability to be successful -- are we talking about adding sales people, marketing or advertising programs? I'm trying to get a sense for the types of things you could do. Thanks for taking my questions. I'll hop back in the queue.

The answer to your question is yes. I think that there are things on the sales and marketing side, I think, that become obvious. There are also some opportunities that we see of some of the things that we are doing in the way we process orders and the throughput that could give us some distinct advantages in cost in the manufacturing side, which one might use as -- still be able to hold margins, but use pricing as a competitive tool. I think there are several opportunities.

Thanks again.

Scott Gleason, Stephens.

Thank you for taking my questions. I guess, Jim, you guys have a pretty strong balance sheet here with quite a bit of cash, and also your stock is trading at a pretty strong premium from a valuation standpoint.

I guess when you guys think about acquisitions here, is there any, I guess, desire by the Company maybe to take on any larger projects? And I guess also can you maybe give us a little bit more color just on maybe the potential timing of some of those deals, whether the pipeline is pretty robust here for the next couple quarters.

Well, I think there are two questions. First is, I think you are asking would we consider using stock as a currency versus cash. And the second is when might we announce the next acquisition and how big will it be? Those are pretty good questions. I'm not sure I can or will answer them exactly as you ask them -- or as I've rephrased them.

But first of all, looking at currency, the answer is admittedly good. We've got cash that's far in excess of what we need for our regular operations. I've tried to cover some of that by talking about using that cash in addition to where we might use it from a standpoint of acquisitions, where we can use it and see some opportunities to ratchet up our market share growth. And at our current share price, our stock is certainly a good currency to use. I don't think our stock price is going to -- my feeling is that in a market as astute as it is, I don't think we are going to see that price fall, but it's still a decent multiple based on what we're doing out there.

At the same time, cash is cheap. Cash is much cheaper than equity is today. So I would not see us using any stock from the standpoint of doing stock-based acquisitions. Given the fact that cash is so cheap, I'm not sure on what our current borrowing rate would be. But in and around under 1.5% to under 2%, we can go borrow more money probably then we can pay back at under 2%, and we are sitting on a significant amount of cash. So I would not think that we would be using stock as a currency.

When will we announce the next one and how big will it be? We don't have a [Letterman 10] in place today. I would like to be doing bigger acquisitions than we are doing. But if you look at our track record, we've done I think 18 over the last 10 years now, and none of those have been real big.

So we are pretty accomplished at taking reasonable-size companies and merging them in, many of them as bolt-on acquisitions. We've developed a process for doing that, and I think each time we do it we get a little bit better at it.

Do we have a $100 million acquisition standing in the wings today? No. If there was one, would we be interested? Yes. But I can say that is not -- something may change tomorrow, Scott, but that's not where we are today.

Okay, great. Thank you. I guess, Lon, if we were to look at the impact of weather in the quarter, is there any way to break out kind of the year-over-year change I guess in mycotoxin test kits, or is there a way that we can kind of think about maybe what the impact of weather was on a year-over-year basis?

No, I don't know that it is easy to look at that. I specifically mentioned DON. Overall, we break it down in terms of sales in the natural toxin area, and actually those sales were still above last year in the second quarter. So you've got a specific product and a specific group like milling and grain that was impacted by having less DON testing this year. But you know, you've got a product like histamine that is in that group and stuff that continues to grow very nicely and has had solid growth.

So I think we just know that -- we took that into consideration in developing our budgets this year. And we are very much on track and we continue to believe that overall we will see opportunities for growth in those food safety products. It is just the nature of the beast in terms of those naturally-occurring toxins, where you've got harvests and weather that can impact sales from year to year. This is more a typical year in terms of the crop -- or the 2010 harvest was, where it was just more so that the 2009 crop was abnormally high levels of mold growth, and particularly in corn, that produced that DON mycotoxin.

Okay, great. And Lon, what was the percent of sales from international this quarter?

The total revenues -- or international sales were 43% of our total revenues in the second quarter.

Okay, great. And then just one last question. Could you guys give the GeneSeek and BioKits actual revenues on a quarterly basis, for calculating out the organic growth rates? What the actual revenues tied to those two deals where?

That's one we'd probably have to get back to you with.

Okay. Thanks for taking my questions, guys.

Tony Brenner, Roth Capital Partners.

Thank you. Lon, you reeled off a whole list of businesses with strong double-digit growth rates, and the end point is a 10% organic sales growth rate. Surely milling and grain mycotoxin testing can't be the only weak spot in there.

Well, you've got -- it was only up 3%, and it is a significant chunk of revenues. And the general sanitation group was up 5%, had nice solid growth and stuff, more ordering patterns than anything else. Still up 12% on a year-to-date basis. Those were the two in Food Safety.

In Animal Safety, I think I mentioned a comment about a couple of distributors. So we had some soft spots in some of our [ethical] sales of those products. But we just had a lot of those products that were just -- they were all -- most of the groups were all up; it is just some of them weren't up, and we had a couple big winners, like allergens.

And some of that, Tony, gets camouflaged, as I tried to indicate earlier. Whereas we might have sales of a diagnostic test to detect peanuts or gluten or milk or eggs, they might have been down compared to -- that same product compared to prior year. But the product that we acquired the replaced it overall on the Tepnel side was up. So it's kind of hard to say. When there is this substitution of products that are going on, it's sometimes kind of hard to separate revenues from acquisitions versus revenues from organic growth.

The new FDA regulations, which don't actually exist but when they do exist, would mostly affect what -- your food pathogen test kit business or other businesses?

I think it is going to be pretty broad. It's going -- pathogens -- food pathogens are going to be in the forefront. However, one of the ways to control food pathogens is in sanitation. So there won't be a regulation setting for the sanitation, but I think we will continue to see that product line as a strong tool, as people are working towards complying with the regulations.

And there is no question that the natural toxins, though they don't often kill people on the spot like E. coli would, are important and are concerns because of their carcinogenic effect. So I think we will see some of that welded into --. And there are currently FDA regulations related to, for instance, aflatoxin, that are not being very -- I think not being enforced very rapidly around the world, particularly on food products. They are probably more enforced on animal products because we can tell what happens to an animal when it eats corn that has got aflatoxin in it. When you or I eat something that's got aflatoxin in it, it may be working on our liver, but it doesn't show up the next month as to what has happened.

So I think whereas FDA -- for instance, there is an FDA regulation in this country that it is against the law to sell a product that's got more than 20 parts per billion of aflatoxin. I suspect that has not been very heavily enforced. I think we might see that enforcement occur more, and that will be obviously from the cereal grains standpoint, to people that are making cereals and other grain products.

So it will be interesting. I think you are right -- the lion's share of the immediate attention is going to be aimed at those foodborne illnesses that happen rapidly, which will be the food pathogens, the microbiological side.

Okay. Mentioned that international in total was 43% of the business. Europe was up 41%. Do you have an increase in the second quarter for the total international business?

I'm not sure I understand --.

Don't know we've got a percentage increase. We might be able to calculate it here and give it to you; otherwise, we will have to give it to you later today.

Okay.

That was kind of widespread, that -- going from 40% to 43% was total. So some of that happened in --.

As near as we can tell from the numbers we've got here and the quick calculations we did, it looks like the international sales were up more than 30%, maybe as much as 38% in the second quarter this year compared to the same quarter last year.

Okay. And last question, could you talk a little about what happened in gross margins in the second quarter, why they declined and what the outlook there would be?

It's a good question and one that comes up periodically. It is -- there was nothing unique about the second quarter. It is directly a matter of the product mix in terms of how they fall in an individual quarter.

I think you remember when we did -- that's why we kind of focus on the operating profit line. And GeneSeek would be a good example. There is a product line that has been added in this year that has proportionately a higher cost of sales and therefore a lower gross margin than some of the diagnostic products, but the operating margins for it is very high. So it had an impact of probably bringing down the gross margin line a little bit, those product sales, but actually contributed to helping the operating profit to go up as a percent of sales.

So it really is all product mix. There is no price erosion in terms of ASPs. There is no cost increases for raw materials that is running away or anything like that. We keep a very close eye on that and monitor that actually each month in terms of our costs. And it is all associated with just the product mix for the quarter.

And that will vary quarter by quarter, or with the GeneSeek acquisition, it is going to be a little higher than it was previously?

It can vary quarter by quarter, and I think has in the past. If you go back and look historically, you will see that we've had some percentage swings of up to 2% to 3% even sometimes, depending on the mix.

As an example, I talked about the corn situation, the grain situation. Remember that we are a commodity grain buyer for all of our rodenticide business. So we are buying corn to feed rats and mice, just like Tyson buys it to feed chickens. The outcome is a bit different, but they are still -- we are somewhat the victim of what commodity prices might do. They're not going to move the needle very much, but what they might do in terms of gross margins.

Thank you.

Marco Rodriguez, Stonegate Securities.

Morning. Thank you for taking my questions. Most of them have actually been asked, but I do have a couple quick ones. I don't know if I missed this in your prepared remarks, but do you have the organic growth rates for the Food Safety and Animal Safety?

The answer is yes, we do.

We do have it. We are trying to look at it to adjust for the currency translation.

Food Safety was up 12% for the quarter, organically. Animal Safety was up 7%. So both groups had a very solid quarter in terms of organic growth. On a year-to-date basis, those numbers are like 18% and 7%. So for organic growth, as I indicated, 13% overall, excluding currency translation, and very strong so far this year.

Okay. I'm sorry, so the 12% and 7%, that is including the ForEx headwind or excluding it?

That excludes the impact of the currency translation.

Okay, got it. Thank you. And then on the operating expenses, looking back at the last three to five years of your reported results, it seems like this was the first quarter or second quarter where you saw a sequential decline -- sales and marketing kind of flat, G&A down, R&D down.

Can you talk a little bit about what might have driven those results? And then also, in your last 10-K, you guys talk about maintaining at least your sales and marketing line item at roughly 20% of revenue, and we're currently running around 17%. So should we be thinking about that a little bit differently?

In terms of the individual operating expenses, this is a quarter where we experienced the leverage of having continued strong growth in sales without having to add proportionately variable cost in those areas like G&A and sales and marketing, particularly.

I think that the R&D projects depends on what kind of third-party payments that we have. Some contract payments sometimes come into play there that can affect quarterly comparisons. I will say that in the area of both R&D and sales and marketing, it is our intention to continue to make investments there, because we think that's the best way to build the growth going forward.

It is true that in this individual quarter, they are down sequentially and we've benefited from that, and that has helped improve operating margins. But as Jim indicated in his comments, we are really looking to do some things, particularly in the sales and marketing area, where we might make some additional investments there so that we can enhance organic growth particularly going forward because we think there are opportunities that exist out there that we should be taking advantage of. So I would be hesitant to move that number down going forward. I think we've already stated that we want to maintain that effort in R&D for us to continue to do the things we need to do to have a business that will get -- even now, beyond $200 million in sales, we are going to have to have a strong R&D program and we are going to continue to make investments both from a personnel standpoint as well as actively working on new projects.

So I would actually think that in the quarters ahead, both of those might move up a little bit from what you saw in the second quarter.

And to further elaborate on that, as far as R&D is concerned, and remembering back to this time a year ago, if you just look at the quarter, as Lon says, there are some third-party payments that go in there, other than just staff and materials of people that we have in our own laboratories. I think that was a little bit higher. Our approvals for AOAC that are third-party validations, and some of those expenses appropriately go into R&D.

So that was a difference there. But I think on a year-to-date basis for the first six months, as I remember, our expenditures or investment R&D is probably up in the 9% to 10% range. So don't look at just one individual quarter.

Okay. And then lastly, in regard to your commentary on implementing new programs here to capture more market share and drive growth, do you envision those particular projects as somewhat bucking the normal seasonality that you have here from Q2 to Q3?

Well, they will help. We can't change the seasonality. Seasonality becomes less and less important as we move from southern -- having more business in both northern and southern hemispheres, and involved in more lines of business in which the cycles of seasons and weather are not as great.

But I guess I really don't know the answer to that, other than I would hope that based on some of the things that we are looking at that we will be -- we should be able to push revenues and commensurate operating profit up over the next two quarters. But I'm not sure that it is going to, as you position it, to actually buck seasonality. I don't think we are going to be able to offset the seasonality in some of our sales.

I don't think we are focusing on programs that are specifically aimed at trying to be contra-seasonal to what we have currently. I think we are more looking at it from a strategic standpoint in terms of what opportunities are out there in markets that we think we have an opportunity to increase our market share or access markets that we are not penetrating as far as we should when we know the opportunity is there. And we've asked our sales and marketing teams to look at it from that standpoint.

And it gives us a chance to bring in a little extra in the last two quarters of the year, but probably more important, puts us well-positioned to kick off the new year with a little more critical mass than we might have otherwise.

Okay, great. Thanks a lot, guys.

Steve O'Neil, Hilliard Lyons.

Just a couple of quick housekeeping questions, and this may be the same answer as in the first quarter. Your large swing in other income to minus $119,000, I just wonder what was the reason for that.

I think we did talk about this in the first quarter. And Rick is in a better position to elaborate on this when he gets back. But we do have -- because -- we talked about GeneSeek earlier, and because they are doing so well, we do have some contingent consideration that is based on their performance. So we are taking a conservative approach and making sure we are accruing those as we go along, because their performance has exceeded what we had in our budgets. And that is the biggest impact on that line.

Okay. And then you talked about Soleris and some of the foodborne pathogens. Just to clear it up, how did AccuPoint perform?

I don't have that particular -- just that specific product broken out; on a year-to-date basis, our general sanitation group is up 12% and they were up 5% in the second quarter.

I think -- again, I think they have been running very solid around that double-digit number organic growth for a number of years now. And they've had an individual quarter here and there like that, like we saw in the second quarter, which is pretty much ordering patterns or timing of when we bring on new customers.

I know there are lots of opportunities out there; it gets mentioned in every monthly operating meeting we have, and we continue to feel good about the opportunities that exist overall for AccuPoint, and in general for that -- ongoing growth in that general sanitation line.

And when you refer to general sanitation, is that just Soleris and AccuPoint?

It is not Soleris.

Oh.

It would be primarily AccuPoint. There might be a few other things in there. That is why I said I don't have specific -- and of course, the AccuPoint includes a number of different disposable sampler products that we have in addition to the readers. And it kind of depends on the readers in terms of whether they are sold on reagent rental agreements or whether they are sold outright as instruments, and that can impact an individual quarter.

Lastly, you referred to a 28% increase in veterinary instruments in the quarter. Did that include the OTC as well? And you talked about some nice numbers in your prepared remarks, as well.

Yes, if you are talking about 28% overall for veterinary instruments, that would include sales of needles and syringes that are going to the OEM account.

And the [farm] retail stores too?

Yes.

Okay, great. Thank you.

Greg Halter, Great Lakes Review.

Good afternoon -- it is now, I guess. Quick one for you regarding the Company's plan for capital spending. I think we had been looking for about $6 million for the full year. Is that still where you are on pace for?

That is one that is going to be tough for us to answer without Rick here. I don't know that we are doing anything different than what was included in our plan as we stand here today.

Okay. And regarding (multiple speakers).

No big CapExes that are unanticipated are -- that are going to be brought in.

The year-to-date number for purchases of assets, most of which would be capital expenditures, is $3.4 million. So it looks like we are pretty much on track. I'm not aware of any big CapEx numbers that are coming in that would cause us to go off, so I would say we are pretty much on plan.

Okay. And regarding Rick and Steve, when does Steve officially start with the Company?

He officially started yesterday. He is -- so far, he has been issued a pass to the front door, and he knows where his office is. But he will catch up pretty fast. Give him a week or two worth of honeymoon and then he'll be ready to go.

And Rick -- as I mentioned, it's unfortunate Rick is not here this morning. It's totally unrelated to this announcement. But Rick will continue to be around. His value to the Company and his value to help Steve get started is going to be extremely worthwhile. And he is willing and Steve is willing, and this thing is going to work pretty good.

It is a change, in that when we started the business, we didn't have any money to hire a CFO. So I served that role until I could no longer count the beans -- keep up with the beans. And then we got Lon in, and he did a yeoman's job, of course. And then the next one was Rick.

So the CFO spot in this Company has been extraordinarily important in our overall growth and keeping up with what we are doing. So we were very cautious in who we hired, and the selection of Steve Quinlan.

Okay. Thank you.

Steve Crowley, Craig-Hallum Capital.

Just a couple quick follow-ups, given Rick's disappearing act today. In terms of the other income line, you guys have historically done a pretty good job on the hedging side of the equation to offset some of the operating margin hit from FX swings. Do you know if there was anything that served as a bit of an offset this quarter?

I would have to go back and look. I don't remember, because when you go back now, we are talking about all the way back to September, so -- where we were hedging the Euro as far as currency hedges were concerned -- the Euro hedge versus our receivables that we've been doing.

There is -- so no, without doing a little research, no, I can't tell you.

Well, maybe I come back to there, just because you mentioned the operating income hit. But my thinking is there might be some offset there to that operating hit that might have lessened its impact on the ultimate bottom line. But I can come back to you on that.

In terms of your comment about having seen some distributors reluctant to place stocking orders at the end of November, I'm wondering what subsequent election returns you have had on their mindset and their activities. Have they come back into the more normal mode of activity or showing signs of doing so? What can you tell us about that?

We had a couple distributors and one specifically that comes to mind and stuff. Typically, when you get to the end of a quarter, those guys are very open to working with us on promotions, making sure they've got what it is they need in-house going forward.

I think overall, they are just from a quarter-to-quarter basis depending on what their cash situation is is dependent upon and affecting their ordering patterns. And some of those guys have been acquired in the last couple years and have got new owners that are, I'm sure, keeping the cash reins on them a little tighter.

Overall, when you look at it over the course of the year, I think that stuff has pretty much worked its way through. It is just that periodically sometimes at the end of a quarter we see something pop up like this. But the ordering patterns overall, year in and year out, those guys have brought their inventories down, on average, to as low as they can and they are pretty much ordering predicated on what they need to fill their customers' needs.

So it doesn't seem like it is kind of a growing, spreading problem, but something that periodically jumps in the equation.

Yes, not at all. It is just the nature of the beast in terms of this particular economy and a particular situation that maybe given in terms of timing in any -- end of any specific quarter for a particular customer.

I see. And in terms of the lever that you guys have been planning to pull as it relates to manufacturing of some of the disinfectant products in Wisconsin and enhancing gross margin that way, is that something we've started to get into or is still in front of us, and how far in front of us do you think?

No, we have gotten into it. We are manufacturing a couple of those disinfectants ourselves, and we have a program underway to continue adding to that in-house manufacturing capability. And we've got the list in terms of which ones we are going to go after next. There are two or three that we are doing now. We started off with the largest one, and we are going to continue to look at that to enhance our gross margins and bottom lines for that disinfectant product line.

Do you think it was just (multiple speakers).

As part of that, we are building a significant new warehouse in Randolph, with some support from the economic development of the state of Wisconsin, as well as the local municipalities. We needed the extra space in order to be able to expand out there. So this new warehouse on the same site as where all the manufacturing is will help us move along a little faster with that.

Do you think most of the benefits of that bringing the manufacturing in-house are still in front of us in terms of impact to the income statement? Or are we a third of the way there or two thirds of the way there? Just -- I don't want to be waiting for some extra gifts under the tree and Christmas has already come and gone.

I don't know that I have a specific number for you. We have not done all of it that we want to do. It is not -- at this juncture, it is not going to be the kind of thing that is going to move -- when you are talking about a single product line of all that Neogen has, it is not going to move the gross margin line by 100 basis points. We are picking up 5 basis points here there, depending on the size of the product that we bring in-house.

So there is still more to come, but you are not going to see some huge change as a result of us starting to manufacture a disinfectant in-house in a particular quarter on the gross margin line.

Great. Thanks again for taking my questions.

You bet. That -- do we have other questions, or does that conclude where we are?

We have no further questions at this time. Do you have any closing remarks?

Good, good. Yes, well, the closing remark is thank you all for your continued interest in the Company and how we are doing and where we are going. And we will -- as both Lon and I have indicated, we are very optimistic about where we are going and we are optimistic that the value of the Company will continue to grow, as it has, as we move into this current quarter.

With that, a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.